FOR LIVE PROGRAM ONLY Managing Sales and Use Tax Risk: Reviewing Nexus Activities, Procurement Processes and Policies to Minimize Exposure TUESDAY , MAY 2, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Managing Sales and Use Tax Risk May 2, 2017 Michael T . Dillon, Esq., President Dillon Tax Consulting, Annapolis, Md. mike@dillontaxconsulting.com Martin Eisenstein, Managing Partner Brann & Isaacson, Lewiston, Maine meisenstein@brannlaw.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Managing Sales and Use Tax Risk 5 Records and Processes to Examine in a Sales and Use Tax Compliance Review
Records and Processes to Examine in a Sales & Use Compliance Review 6 What is A Compliance Review? Comprehensive analysis of the sales tax compliance processes • and requirements with various jurisdictions for sales of products and services and purchases for resale and consumption Report provides findings of nexus, historical exposure, • solutions to address historical exposure and provides recommendations for enhancing the Company ’ s multistate sales tax compliance processes Don ’ t want to move forward without considering the past •
Records and Processes to Examine in a Sales & Use Compliance Review 7 What is A Compliance Review? Interview tax/finance, sales and operations • Review nexus factors through multistate nexus questionnaire • Rank nexus scores in each state • • Audit sales and purchases for historical exposure o This can be based on sales tax decision matrix or high-level assumptions Quantification of sales and use tax exposure •
Records and Processes to Examine in a Sales & Use Compliance Review 8 What is A Compliance Review? Stratification of states based on exposure and nexus analysis • Recommendations to address historical nexus and exposure • include voluntary disclosure and available amnesty Recommendations to address and enhance prospective • compliance processes include registration, sales tax decision matrix, automated compliance and exemption certificate mgmt, website, collateral, contract and invoice literal changes, and record retention, and use tax accrual processes
Records and Processes to Examine in a Sales & Use Compliance Review 9 What processes to review • Nexus - Sales / Delivery / On-site Services (more on this later) • Contracts / Invoices – what do they say about what you sell? And where - delivery and transfer of title? • Record retention o Resale and Exemption Certificates o Audit Trail Documents – invoices and detailed reporting • Tax Decision Matrix – properly taxing what needs to be taxed? • Rates – properly rating what needs to be taxed?
Records and Processes to Examine in a Sales & Use Compliance Review 10 What records to review Summary of sales by customer by state and listing of any • resellers / exempt customers Summary of monthly AND by revenue category 3 yrs • Detailed monthly sales by state for 3 yrs: Customer Name, Sale • to Jurisdiction, Invoice Number, Invoice Date, Invoice Amount, Revenue Category, Invoice Detail/Description • Copies of several sample contracts and invoices for the mix of products and services Access to sales invoices, contracts, certificates – sample •
Records and Processes to Examine in a Sales & Use Compliance Review 11 What records to review Fixed Asset schedule, including purchase date and location • Expensed Purchase report, summarizing purchase activity by • account and location for 3 yrs Payroll by state • • Listing of states in which sales representatives travel, including for tradeshows for 3 years • A listing of any subsidiaries and affiliates operating in the US, and all information above relating to their activities Existing Tax Decision Matrix •
MANAGING SALES AND USE TAX RISK Nexus Reviews to Ensure that the Company Identified Potential Areas of Risk By Martin I. Eisenstein 12
NEXUS REVIEWS: OUTLINE • Background re nexus • Why it is important to know about nexus • Nexus Questionnaires • Remedial Measures 13
NEXUS BACKGROUND • Nexus: o When a company is subject to state tax o Both statutory and constitutional standard o Different standards depending upon tax o Entity nexus Not divided by product line, activity or division Nexus of one division or activity gives nexus for the entire entity with a few exceptions 14
SALES TAX NEXUS STANDARDS • Constitutional Commerce Clause Standard Under Sales Tax: Physical Presence – Quill (1992) o Property Facility Tangible Personal Property -Inventory o Employees Located in state Travel to state 15
SALES TAX NEXUS STANDARDS (CONT’D) • Third Parties: Agents and Representatives o Solicit sales o Drop ships o Order Fulfillment-White Glove o Installation/Repairs o Fulfillment by Amazon o Amazon Marketplace o Apple contracts • Click Through Nexus statutes 16
CURRENT DEVELOPMENTS: AFFILIATE STATUTES • Member of commonly controlled group of companies: Affiliate Nexus o E.g. CO, OK, UT • Out of state retailer uses in-state affiliate to distribute goods or service products. o E.g. TX statute • Affiliate sells under same trademark o E.g PA regulation o New Mexico Taxation and Revenue Department v. Barnesandnoble.com LLC , 303 P.3d 824 (2013) o St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F.Supp2nd 575 (EDLa. 2007) 17
ANTI- QUILL STATE LEGISLATION 18
SAFE HARBORS REGARDING NEXUS • Use of Servers in State o CA/TX/WA statutes and rulings in other states • Trade Shows o CA o MA o FL • Printers o States include CT, FL, GA, IL, IN, KY, ME, MN, OH, OK, PA, SC, UT, VA, WV and WI Storage of paper Visits by personnel 19
INCOME TAX NEXUS • Constitutional standard may be different than sales tax standard • PL 86-272: federal statutory exemption for out-of-state company if: o Employees or agents merely solicit sales; o Orders are approved outside of state; o Delivery of products from inventory outside of state; and o Sales are only of tangible personal property. 20
GROSS RECEIPTS TAXES NEXUS • Only a few states have gross receipts taxes: WA, OH, TX, TN and NV and some local jurisdictions in CA o WA B & O tax (except for tax on wholesalers and providers of services) requires activity conducted in the state on behalf of the company that establishes or maintains a market for the company’s products o OH (CAT), and TN (Business Taxes)statutes provide nexus if annual sales to state exceed $500,000; WA for wholesale and service if sales greater than $267,000; NV (Commerce Tax): sales greater than $4 million 21
LESSONS • Quill remains good law, but be careful about other state taxes. o Income taxes: KFC Corp. v. Iowa Dept. of Revenue , 792 N.W.2d 308 (Iowa 2010); Capital Bank One v. Commr. of Revenue, 453 Mass.1, (2009); Geoffrey, Inc. v. South Carolina Tax Comm. , 313 S.C. 15 (1993). o Gross Receipts taxes: Crutchfield v. Testa , Ohio Supreme Court Slip Opinion No. 2016-Ohio-7760 (November 17, 2016) • States on a witch hunt for nexus. See MA Department of Revenue Directive 17-1. 22
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